Fascinating quote from Nick Dunbar, author of The Devils Derivatives:

“What would happen if VaR was taken out of bank regulation? Immediately, the intellectual crutch for highly-leveraged complex banks would disappear. Deprived of their fancy radar screens, regulators would have break up large banks that they could no longer pretend to understand, while increasing their capital to the level of a typical hedge fund.”

In other words, VaR’s sole purpose was not to actual help with risk management, but to fool the regulators that banks could rely on their own models to (wait for it) manage their own risk.

Make them smaller, reduce their leverage, and do, as FDIC vice Chair Thomas Hoenig suggested, turn them into utilities.

Congress missed a once in a generation opportunity to halt the egregious bank lobbying. They appropriately halted the GSEs lobbying efforts when they rescued their bond holders, but failed to do the same to Citi, Bank of America, AIG, Goldman Sachs, etc. It was a terrible missed opportunity.

If I’d have my way, I npot only would have put strict limits in lobbying activity on all banks and investment firms, I’d make the penalty for lobbying on behalf of those financial institution a capital offense punishable by death . . .



What JP Morgan’s release of VaR has in common with sex and computer viruses
Nick Dunbar
Devils Derivatives October 15th, 2012  

Category: Derivatives, Really, really bad calls, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

15 Responses to “The Scam That is Value At Risk (VaR)”

  1. PeterR says:

    Good sentiment Barry, but the proposed capital punishment runs afoul of The Golden Rule:

    “He who has the gold makes the rule.”

    “Talkin’ ’bout Revolution” as perhaps the only solution for the many Midas’s in our once-fine country?

    As Jeff Daniels’ character says here, which you thankfully linked for us:


    ‘Nuff said . . .

  2. Moss says:

    All the banksters really care about is how to justify their obscene and immoral compensation schemes. Obscuring the reality on derivatives is one way. They have many others.

  3. Tarkus says:

    I think it was Dick Durbin who said of Capitol Hill “They own the place.”

    Seeing as how they get the unfair advantage of the cheapest funding, I suppose that would be the first place to buy…

  4. JimRino says:

    VaR, where you calculate real-estate price history with a 2 year dataset.
    - Not a 20 year, or 50 or 100 year dataset.
    A 2 Year Dataset, and they got away with it.

  5. louis says:

    Which means we get to watch this all happen again. If you are not in the club you are better off using all excess capital to buy baseball cards.

  6. cognos says:

    This is non-sense.

    If you want more banks… promote new ones, smaller ones. This is the opposite of what onerous regulation does – complex oversight PROMOTES the largest banks. Its simple.

    And finally, LARGE banks fared BETTER in the crisis. Why dont you guys look at the 1,000s of small regional bank lenders that failed and had the worst “toxic” assets often lent to close associates?

    Witch hunting is sad.

  7. Bill Wilson says:

    Banks should be treated as a utility. We allow them to create money out of thin air, because we want capital to be available for the economy. Most American’s don’t seem to understand that. Wall Street’s anti-regulation propaganda would not go so far if people actually understood how banks create the money that they lend.

    Don’t get me wrong, I’m not out to ban fractional reserve lending. But, every time a bank creates a dollar, the dollars that we’ve earned and the stability of the economy are a risk. That means we have a right to manage bank risk by lowering leverage to 5:1, keeping banks small enough to fail, and bringing back Glass-Steagall.

  8. AHodge says:

    i am going to defend VAR in its place,
    its modest place
    IF done right
    and also having a risk dept to weigh all the other risks not seen in past price volatility
    which is ALL that VAR tells you–thats its only input

    the regulators have literally no ideaa what good VAR would be
    remember what it is an analysis of the past interrelations and volatility of asst prices–nothing else
    if you take as inputs the last 6 months of daily (unmarked) positions
    and say good they didnt more much there is little risk
    you will be doing what nearly every fool bank and regulator applies.

    if i was forced to choose between VAR and a functioning credit dept looking at
    wheres the business cycle, whens the next oil shock
    are the company managment honest, how levered are they
    but we dont have those anymore
    we did away with analysis and judgement about a decade ago
    and replaced them with a “model”
    and got what we deserved.

  9. Frilton Miedman says:

    Watching Justice Scalia on Piers Morgan the other night offer viewers the friendly reminder that “money is speech”.

    In three words he casually sums his endorsement for the single greatest threat to Democracy as if he’s talking about the weather.

    If there’s no other reason to stress he importance of Obama’s re-election, think about two more SJC justices like that, whom completely ignore the word “bribery” as it appears in the Constitution.

  10. Bokolis says:

    VaR is part of the new math? Holding unstable, unpredictable variables constant so you can sell product is part of the same old shiznit. Someone growing the balls or heart to stand up to this would be a development.

    I’ve started recruiting for the death execution squad, just in case. There are plenty of experienced candidates in Texas.

  11. A says:

    Congress is not going to penalize its owners.

  12. carleric says:


    As a native Texan you can sign me up….protecting banks from their own stupidity and greed certainly should also be a capital offense…as the saying goes, “Get a rope”

  13. louis says:

    Works so well untill Nobel Prize winning Hedge Fund managers are reduced to tears.

    When the correlation ρ is –1, the VaR is minimized and we have
    2 2
    1 2 1 2 1 2 2 p VaR = VaR +VaR − VaR ×VaR = VaR −VaR ;
    when the correlation ρ is zero, the VaR for the portfolio is
    ( ) ( ) 2 2 2 2
    p 1 1 2 2 1 2 VaR = α w Pσ + α w Pσ = VaR +VaR ;
    and when the two components are perfectly correlated, i.e. ρ = 1, the VaR is
    2 2
    1 2 1 2 1 2 2 p VaR = VaR +VaR + VaR ×VaR = VaR +VaR

  14. killben says:

    “Congress missed a once in a generation opportunity to halt the egregious bank lobbying. ”

    This implies that Congress did not see or seize the opportunity. This is not the case. Congress WAS NOT INTERESTED in doing it. As simple as that. When you have a Congress whose interest is to enable bansters pillage the citizens by enabling it in all fashion ably assisted by the Fed and its leader, The Economic Hitler.

  15. capitalistic says:

    Whoa. I wouldn’t say VaR is a scam, but it’s more like a tool. Risk management is more qualitative than quantitative.